Asian banks' credit quality to be stable in 2015: Moody's

But China and Indonesia must take caution.

Moody's Investors Service expects that Asian banks' credit quality will be mostly stable in 2015, even as credit costs increase and asset quality weakens.

According to a release from Moody's Investors Service, most banking systems in the region remain well capitalized and profitable, with some exceptions.

Moody's analysis is contained in its new report "2015 Outlook - Asian Banks: On Solid Footing Against Rising Credit Headwinds" , which examines 16 systems globally, and divides them into six broad categories in terms of their bank credit outlook.

The stable footing will allow banks to withstand increasing credit costs. Moody's anticipates a gradual strengthening in the region's growth momentum as external demand, particularly from a recovering US economy, improves.

"Still, the likely divergence in monetary policy among industrial economies such as the US, UK, mainland Europe and others, could challenge some Asian banking systems," says Stephen Long, a Moody's Managing Director -- Financial Institutions Group.

"Those systems with high leverage and elevated dependence on capital inflows are vulnerable to adjustment challenges," adds Long.

Here's more from Moody's Investors Service:

Moody's points to China and Indonesia as systems where banks remain at risk of adjustment pressures after a period of strong credit growth, but notes that their banking systems still have stable outlooks due to loss absorbing buffers.

Generally, global liquidity will remain supportive, and coupled with generally good loss absorption buffers and good funding and liquidity profiles, will mitigate the risk of disruptive shocks, says Moody's.

That is reflected in Moody's average bank deposit ratings in Asia, which are positioned above those in other emerging markets. In addition, 93% of Asian bank ratings have stable or positive outlooks, including reviews
for possible upgrade, says the rating agency.

However, Moody's says that the credit quality of Asian banks has peaked, and points to asset quality as a mounting credit risk confronting Asian banks despite their current reported low level of problem loans.

Indian banks' profitability could decline as high credit costs are needed to buffer against deteriorating asset quality, says the rating agency. In addition, low interest rates and high competition for borrowers in Japan will continue to pressure net interest income for the country's banks.

In addition to the effects of tightening monetary policy in the US, a sharper than expected slowdown in China remains a key downside risk for the region.

Asian banks are likely to continue to issue Basel III PONV securities, after issuing more than US$84 billion in 2014 as of 5 December, says Moody's. The rating agency also expects to see continued robust merger and acquisition activity among Asian banks in 2015.

Banking systems covered in Moody's report include Australia, China, Hong Kong, Korea, Japan, India, Indonesia, Malaysia, Mongolia, New Zealand, the Philippines, Taiwan, Thailand, Singapore, Sri Lanka, and Vietnam.